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Past Economic Downturns and Outlook for Foundation Giving

October 13, 2008

(Steven Lawrence is senior director of research at the Foundation Center. This is his first post for PhilanTopic.)

The Foundation Center has been fielding questions about the possible impact of an economic downturn on foundation giving since the credit crunch began to grow worse in the latter half of 2007. A series of high-profile bank failures and buyouts, falling equity prices, and predictions of a serious recession have led to renewed concerns about the health of the nonprofit sector and foundations that serve as one of their sources of support.

The impact of the current financial market meltdown in the United States and around the globe is in many ways unprecedented. And with no clear bottom in sight, it can be tempting to conclude that the work of many institutions will be imperiled -- or, at a minimum, substantially compromised. Short of total economic collapse, however, the behavior of institutions during prior economic downturns provides some perspective on how they may weather today's challenges. This certainly seems true for foundations.

Since the Foundation Center began collecting data on all grantmaking private and community foundations in 1975, the United States has experienced several recessions. During most of these recessionary periods -- 1980, 1981-82, and 1990-91 -- U.S. foundation giving in inflation-adjusted dollars did not decline -- and, in fact, increased slightly.

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Sal_charts1_4   

After the most recent recession, foundation giving did decline -- from $30.5 billion in 2001 to $30.4 billion in 2002 to $30.3 billion in 2003 -- the first consecutive years of decreased foundation giving tracked by the Center. But this marginal 0.6 percent reduction (4.4 percent after inflation) was quite modest compared to the inflation-adjusted 16 percent drop in foundation assets recorded between 2000 and 2002.

(click on chart for larger image)

Sal_charts2_2   

A number of factors helped to moderate the impact of reduced assets on overall foundation giving during the last economic downturn and is likely to play a similar role during the current crisis. First, donors continued to establish new foundations -- 3,000 grantmaking foundations were established in 2002 and more than 1,500 in 2003. Second, donors continued to direct substantial gifts and bequests into the endowments of existing foundations. Third, foundations that determine their grants budgets each year based on a rolling average of their asset values over the prior two to five years -- including a number of the largest foundations* -- helped to ensure more stable levels of giving by foundations overall.

(*According to the Foundation Center 's 2003 "Foundation Giving Forecast Survey," of the 497 respondents indicating that they based their grant appropriations budgets on the value of their endowments, over one-third averaged the value of their endowments over two or more years, while close to half based their grant appropriations budgets on their prior year's endowment. But among larger respondents -- those reporting giving of $10 million or more in 2002 -- more than two-fifths reported basing their grant appropriations budgets on the value of their endowments over two or more years.)

In addition to these factors, a number of foundations indicated a willingness to reach into their corpus during the last downturn to ensure that multiyear commitments made during the late 1990s were met. Some even increased their payout rate to provide needed resources to communities and organizations they had long supported. (See Renz, L., Assessing the Post-9/11 Funding Environment: Grantmakers' Perspectives, New York: Foundation Center, 2002.)

Although the economic outlook has worsened over the course of 2008, these and other factors revealed by a survey of the country's largest independent, corporate, and community foundations led us to predict in Foundation Growth and Giving Estimates (released in May) that foundation giving will grow faster than the rate of inflation in 2008.

Foundation assets grew faster than inflation between 2003 and 2007, which enabled grantmakers to replenish their endowments after the downturn of the early 2000s. For foundations that determine their annual grants budgets based on a rolling average of their asset values, this growth should help to mediate the impact of possible asset losses in 2008 on their giving in 2009. Some foundations also will benefit from new gifts and bequests, and the sector as a whole will benefit from the continued establishment of new and sometimes quite large foundations.

(click on chart for larger image)

Sal_chart3_2   

What does all this mean for 2009? Should the stock market recover some of its losses by year's end, the various factors cited above may help overall foundation giving to remain roughly unchanged next year. That would be the best-case scenario. If, on the other hand, the market fails to rebound from its current level or sinks further, the asset losses may be so pronounced and widespread that an overall decrease in funding becomes inevitable.

While these scenarios are less pessimistic than one might expect given the current turmoil, it is important to note that the experiences of the more than 72,000 grantmaking U.S. foundations and the organizations they support will vary markedly.

Now it's your turn. If you work at a nonprofit, we'd like to hear what happened to your grant revenues in the last recession. And what are you hearing from funders today? If you work at a foundation, how is the fourth quarter and 2009 shaping up in terms of your discretionary grantmaking? Use the comments below....

-- Steven Lawrence

Comments

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The Foundation Center's research, thanks to Steven, is always concise, insightful, accurate and relevant. However, what I find interesting about this data--I hesitate to say lacking since I do not know if what I am about to reference is tracked--is it does not seem to address a few issues: 1) the dramatic increase in proposals received by foundations in general 2) how many foundations have ceased to accept unsolicited proposals entirely (they've moved to "gives only to pre-selected organizations") or 3) how many foundations will not fund new projects or organizations "new" to them. ALL of these are the trends I am seeing so in fact, knowing that foundation giving may remain the same or slightly increase is of very little consolation to me or I assume, to other organizations trying to expand or diversify their funding base to include foundations. Furthermore, these trends will only be tremendously exacerbated by the severe cutbacks in government funding in the current economic crisis when all the organizations suffering from these cutbacks add to the volume of proposals being sent to foundations with the hope of replacing lost government grants. Any research or facts on those trends available? Thanks

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